Press Release

LOUISVILLE, Ky.--(BUSINESS WIRE)-- Yum! Brands, Inc. (NYSE: YUM) today reported results for the third quarter ended September 3, 2016, including GAAP EPS of $1.56 and EPS excluding Special Items of $1.09.

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System sales growth figures exclude foreign currency translation (“F/X”) and core operating profit growth figures exclude F/X and Special Items. Special Items are not allocated to any segment and therefore only impact worldwide GAAP results. See reconciliation of non-GAAP measurements to GAAP results within this release for further details.

THIRD-QUARTER HIGHLIGHTS

• KFC Division same-store sales increased 4%, with U.S. same-store sales growing 6%; system sales increased 7%.
• Taco Bell Division same-store sales increased 3% and system sales increased 5%, while achieving a 21.7% restaurant margin.
• Worldwide core operating profit grew 11%, with the brand divisions excluding China delivering 11% core operating profit growth in aggregate, ahead of expectations.
• China core operating profit grew 14%.
• Opened 475 new restaurants worldwide; 78% of international development occurred in emerging markets.
• On track to finalize China separation with Yum China Holdings, Inc. expected to begin trading on November 1, 2016 on the NYSE under the ticker symbol “YUMC.”
• Foreign currency translation negatively impacted operating profit by $34 million.

¹ See Reconciliation of Non-GAAP Measurements to GAAP Results for further detail of Special Items. Special Items in 2016 are primarily related to a U.S. tax benefit related to previously recognized Little Sheep impairment losses, gains associated with Pizza Hut and Taco Bell U.S. refranchising and costs associated with the planned separation of our China business, U.S. voluntary retirement packages and the agreement reached in 2015 with KFC U.S. franchisees. Special Items in 2015 are primarily related to a non-cash charge associated with refranchising our Mexico business and costs associated with the agreement reached in 2015 with KFC U.S. franchisees, partially offset by U.S. refranchising gains.

Note: All comparisons are versus the same period a year ago. Effective January 2016, the Company’s India business integrated its three restaurant brands into our global KFC, Pizza Hut and Taco Bell Divisions. Prior year figures have been restated to present comparable results.

Full-year GAAP operating profit growth guidance is not provided due to our inability to forecast when gains and losses related to refranchising transactions classified as Special Items will occur, as the timing of these transactions is often outside our control, and the resulting gains and losses are dependent upon future market conditions. 2016 core operating profit growth guidance assumes the China business remains part of the Company through the end of 2016.

GREG CREED COMMENTS

Greg Creed, CEO, said “Yum! Brands delivered third-quarter core operating profit growth of 11% and EPS growth, excluding Special Items, of 9%. For the full year, we are raising our core operating profit growth guidance from at least 14% to at least 15%.

In the third quarter, I was pleased with both KFC’s and Taco Bell’s performance, each of which returned to a focus on core menu items, but in ways that were distinctive, disruptive and relevant. Both brands had accelerating same-store sales growth, despite sluggish QSR industry trends, especially in the U.S. Excluding China, our brand divisions in aggregate delivered core operating profit growth of 11%, which was ahead of our expectations. System sales for the brand divisions excluding China grew 5% in constant currency, driven by KFC where system sales grew 7% with international emerging markets up an impressive 12%. We are excited about the momentum we are seeing in our base business as we embark on the next chapter of growth at our company.

Sales were off to a good start in the first six weeks of the quarter in the China Division. However, anticipated tougher laps in the second half of the third quarter were compounded by an international court ruling on claims regarding the South China Sea, which triggered a series of regional protests and negative sentiment against a few international companies with well-known Western brands. If not for this event, we believe the China Division would have delivered its fifth consecutive quarter of positive same-store sales growth. The good news is the incident was short-lived and the sales impact continued to dissipate through August and September. Despite the protests, Pizza Hut Casual Dining continued its trend of quarterly sequential improvement.

2016 marks the beginning of a massive transformation for Yum! Brands. Step one is the formal separation of our China business, which will become one of China’s largest publicly-traded retail companies with meaningful growth opportunities supported by U.S. governance. New Yum! Brands will become a unique and focused world-class franchisor with consistent, stable cash flow generation and an efficient cost structure that encourages growth. We look forward to sharing the details of our strategic plans for both companies at our New York investor conference on Tuesday, October 11.”

New Global Yum! Core Operating Profit Growth

After the spin-off of our China business, we will reclassify China Division’s historical results and related tax expense, including the first ten months of 2016, to Discontinued Operations within our Income Statement. The China Division’s results presented in Discontinued Operations will include an incremental license fee expense similar to what will be paid by China to Yum! going forward. Likewise, Yum!’s historical results for our KFC and Pizza Hut Divisions, including the first ten months of 2016, will include incremental license fee income from our China business such that recast total net income, including Discontinued Operations, is the same as previously reported results. While we expect to spin-off our China business on October 31, 2016, our operating profit growth targets assume China will remain part of Yum! through the end of 2016.

CHINA DIVISION

• China Division system sales increased 3%, excluding foreign currency translation.
  • Same-store sales decreased 1%, with declines of 1% at KFC and 4% at Pizza Hut Casual Dining.
• China Division opened 133 new units during the quarter.

• Operating profit increased as a result of recent value-added tax reform in China and new-unit development, partially offset by higher labor costs, increased G&A and sales deleverage.
• Foreign currency translation negatively impacted operating profit by $23 million.
• Consistent with prior years, China Division’s third quarter includes June, July and August results.

KFC DIVISION

• KFC Division system sales increased 7%, excluding foreign currency translation.

• KFC Division opened 138 new international restaurants in 42 countries, including 96 units in emerging markets.
• Operating margin increased 2.2 percentage points driven by same-store sales growth.
• Foreign currency translation negatively impacted operating profit by $11 million, as approximately 90% of division profits are generated outside the U.S.

PIZZA HUT DIVISION

• Pizza Hut Division system sales were even, excluding foreign currency translation.

• Pizza Hut Division opened 105 new international restaurants in 40 countries, including 71 units in emerging markets.
• Restaurant margin was 3.1%, a decrease of 4.7 percentage points, driven by refranchising and higher property and casualty insurance costs.
• Foreign currency translation negatively impacted operating profit by less than $1 million.

TACO BELL DIVISION

• Taco Bell Division system sales increased 5%, excluding foreign currency translation.
• Taco Bell Division opened 63 new restaurants.
• Restaurant margin was 21.7%, a decrease of 0.4 percentage points, driven by higher labor costs, partially offset by same-store sales growth and lower commodity costs.
• Operating margin increased 2.0 percentage points driven by same-store sales growth.
  
  
  

SPECIAL ITEMS / SHARE REPURCHASE / RECAPITALIZATION UPDATE

• During the quarter, we recorded a tax benefit of $198 million in Special Items due to our ability to now realize tax benefits associated with previous impairment losses related to Little Sheep that were recognized as Special Items in 2013 and 2014.
• During the quarter, we incurred a Special Items charge of $20 million for restructuring costs related to U.S. voluntary retirement packages.
• During the quarter, we incurred a Special Items charge of $10 million for costs related to the planned separation of our China business.
• During the quarter, we refranchised 94 units outside of China, more than half of which were Pizza Hut units, for proceeds of $61 million. We recorded refranchising gains of $21 million in Special Items.
• To complete our recapitalization strategy, $4.6 billion of new debt was issued in the third quarter.
• Year-to-date through October 4, 2016, we repurchased 54.5 million shares totaling $4.5 billion at an average price of $82. Since we announced our intention to separate the China business, we have repurchased approximately $5.3 billion in shares at an average price of $81, reducing our share count by approximately 15%. We expect to repurchase an additional $0.9 billion in shares before the end of 2016 to achieve our previously announced plan to return $6.2 billion of capital to shareholders (excluding dividends) in connection with the separation of our China business.

CONFERENCE CALL

Yum! Brands, Inc. will host a conference call to review the Company’s financial performance and strategies at 9:15 a.m. Eastern Time Thursday, October 6, 2016. The number is 877/815-2029 for U.S. callers and 706/645-9271 for international callers, conference ID 69624826.

The call will be available for playback beginning at 12:30 p.m. Eastern Time Thursday, October 6, 2016 through midnight Wednesday, November 2, 2016. To access the playback, dial 855/859-2056 in the U.S. and 404/537-3406 internationally, conference ID 69624826.

The webcast and the playback can be accessed via the internet by visiting Yum! Brands’ website, www.yum.com/investors and selecting “Q3 2016 Earnings Conference Call” under “Events & Presentations.”

ADDITIONAL INFORMATION ONLINE

Quarter end dates for each division, restaurant-count details and definitions of terms are available online at www.yum.com/investors.

This announcement may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend all forward-looking statements to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the fact that they do not relate strictly to historical or current facts and by the use of forward-looking words such as “expect,” “expectation,” “believe,” “anticipate,” “may,” “could,” “intend,” “belief,” “plan,” “estimate,” “target,” “predict,” “likely,” “will,” “should,” “forecast,” “outlook” or similar terminology. These statements are based on current estimates and assumptions made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we believe are appropriate and reasonable under the circumstances, but there can be no assurance that such estimates and assumptions will prove to be correct. Forward-looking statements reflect our current expectations, estimates or projections concerning future results or events, including, without limitation, statements regarding the intended capital return to shareholders, the planned separation of the Yum! Brands and Yum China businesses, the timing of any such separation, the future earnings and performance as well as capital structure of Yum! Brands, Inc. or any of its businesses, including the Yum! Brands and Yum China businesses on a standalone basis if the separation is completed. Forward-looking statements are not guarantees of performance and are inherently subject to known and unknown risks, uncertainties and assumptions that are difficult to predict and could cause our actual results to differ materially from those indicated by those statements. We cannot assure you that any of our expectations, estimates or projections will be achieved. The forward-looking statements included in this announcement are only made as of the date of this announcement and we disclaim any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances. Numerous factors could cause our actual results and events to differ materially from those expressed or implied by forward-looking statements, including, without limitation: whether we are able to return capital to shareholders at the times and in the amounts currently anticipated, if at all; whether the separation of the Yum! Brands and Yum China businesses is completed, as expected or at all, and the timing of any such separation; whether the operational and strategic benefits of the separation can be achieved; whether the costs and expenses of the separation can be controlled within expectations, including potential tax costs; as well as other risks. In addition, other risks and uncertainties not presently known to us or that we currently believe to be immaterial could affect the accuracy of any such forward-looking statements. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. You should consult our filings with the Securities and Exchange Commission (including the information set forth under the captions “Risk Factors” and “Forward-Looking Statements” in our Annual Report or Form 10-K) for additional detail about factors that could affect our financial and other results. Reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures are included on our website at www.yum.com/investors.

Yum! Brands, Inc., based in Louisville, Kentucky, has more than 43,000 restaurants in almost 140 countries and territories. Yum! Brands is ranked #218 on the Fortune 500 List with revenues of over $13 billion in 2015 and is one of the Aon Hewitt Top Companies for Leaders in North America. The Company’s restaurant brands - KFC, Pizza Hut and Taco Bell - are the global leaders of the chicken, pizza and Mexican-style food categories. Worldwide, the Yum! Brands system opens over six new restaurants per day on average, making it a leader in global retail development.

In addition to the results provided in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) throughout this document, the Company has provided non-GAAP measurements which present earnings before Special Items, our effective tax rate before Special Items, and Operating profit on a basis before Special Items and foreign currency translation (“Core Operating Profit”). Included in Special Items are costs associated with the planned spin-off of the China business and YUM recapitalization, costs associated with a voluntary retirement program offered to U.S. employees, costs associated with the KFC U.S. Acceleration Agreement, certain refranchising initiatives, a U.S. tax benefit related to previous impairments of our Little Sheep investment, and the impact of the redemption of the Little Sheep noncontrolling interest. These amounts are described in (c), (d), (e), (f), (g) and (h) in the accompanying notes.

The Company excludes Special Items and foreign currency translation impacts for the purposes of evaluating performance internally. Special Items are not included in any of our externally reported segment results. Additionally, we believe the elimination of the foreign currency translation impact provides better year-to-year comparability without the distortion of foreign currency fluctuations, which is quantified by translating current year results at prior year average exchange rates. These non-GAAP measurements are not intended to replace the presentation of our financial results in accordance with GAAP. Rather, the Company believes that the presentation of earnings before Special Items, our effective tax rate before Special Items, and Core Operating Profit provide additional information to investors to facilitate the comparison of past and present operations, excluding items in the quarters and years to date ended September 3, 2016 and September 5, 2015 that the Company does not believe are indicative of our ongoing operations due to their size and/or nature.